The banking industry comps template allows investors to compare one banking company to other ones in the same industry. This method helps to determine the relative value of a particular company. This template looks at JPMorgan Chase & Co, one of the market leaders in the financial industry.
Here is a quick preview of CFI’s banking industry comps template.
How do comparables table work?
A comparables table compares several factors for different companies, which are related to both quality and value. By looking at the comparables table, investors can determine which companies have the best quality at the best price. Comparables is one of the three main ways of valuing a company, the other two being a discounted cash flow (DCF) and precedent transaction. It is easier to build than a DCF as it requires less information, assumptions and input. It is also more accurate than looking at precedent transactions, which can become out of date fast.
Overall, comparables are quite intuitive and are relatively easy to understand. Since the values created are all on a relative basis, the values are easy to interpret as good or bad.
Choosing comparable companies
To make a useful comps table, the companies chosen must have similar characteristics. For example, a bank should not be compared to a technological based company. Since the company operate under different conditions, they will have very different profit margins and trading multiples. Typically, a bank’s growth rate will not be as high as a tech company. This is because banks are more focused on growing stability with a more prudent approach. Thus, the growth rate of a tech startup cannot be accurately compared to the growth rate of a mature company such as a bank.
Thus, when selecting companies for a comps universe, some things to consider includes:
This template focuses on industry classification, size, and geography. While the other three components are important, they require a deeper dive into a companies financial statement. Also, trying to find companies with similar growth rate, profitability, and capital structure also require a more careful selection process.
Banks are part of the financial industry, which is one of the largest sectors in the S&P 500. Trust is one of the most important things for a bank as customers would not deposit money in an institution that is at risk of failing. Therefore, this industry has a lot of government regulations and banks operate prudently to protect depositor’s money. With stability as the main focus, banks, especially more mature ones, have smaller growth rates compared to companies in some other sectors. However, investors in banks receive consistent dividends payout and growth rates. Banks are considered to be dividend stocks and offer investors a stable and reliable income.
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